Approach value investing without falling into the value trap

speaking in Mint Mutual Fund Conclave 2022, Shankaran Naren, Executive Director and Chief Investment Officer, ICICI Prudential Asset Management Company Limited said that people often associate value investing with the opposite investment, “but this is wrong”.

“If you buy junk and say I am value investing. It’s not. As Seth Klarman (American hedge fund manager) said, value investing is at its core a marriage of a contrarian streak and a calculator.” Simply put, value investing is about buying fundamentally strong companies at affordable prices. .

Naren was instrumental in launching ICICI Prudential Value Discovery Fund in 2004. It started with approx Property worth 132 crores and today’s price 25,000 crores.

For Rajeev Thakkar, Chief Investment Officer and Director, PPFAS Asset Management, investing is value investing in itself, the rest is business.

“If the basic view of investing is that the price will go up, your focus is driven by speculation. So, it’s trading. If you’re buying a stock at 80, whose intrinsic value is 100, It’s Value Investing, But Buying On 120 is not investing. People can convert such actions into development and quality investment, but it doesn’t make any sense.”

Experts say finding intrinsic value is easier said than done. For example, people applied the discounted cash-flow (DCF) formula to valuations of new-age companies. “DCF is a mathematical course of action. But it’s like the Hubble Telescope. You move it an inch and you’re in a different galaxy. Similarly, someone based on assumptions of terminal value, growth, and cost of capital. You can get whatever mathematical value you want. That’s where the difference between value investing and daydreaming comes in,” Thakkar said.

He believes that the best fiction is not written on Microsoft Word but on Excel. “Last year people poured a lot of money into low ROCE businesses that were burning cash to acquire customers. In my view, this model will not work in a positive real interest rate era.”

How to avoid the price trap

According to Naren, no one can escape the value trap. “For example, in the period 2006-07, we would read more Benjamin Graham. So, we added a little more cloth, paper and fertilizer, and we realized that this kind of model doesn’t work as well in India. We Dropped it and said let’s buy pharma and consumer. Buy something else the opposite. That approach worked a lot better.”

Another important aspect is patience. Naren said, “Whenever you get the opportunity, you have to grab them and that is the lesson we have learned over time.”

Value investing in asset allocation

Investors should not limit value investing to equities. One of the major initiatives that Naren has taken is to expand it to other asset classes by focusing on a category like Balanced Advantage Fund. “It is also value investing and it is less of a value trap because you are buying an asset class that is cheaper. As an AMC, we had a much more enjoyable experience making value investing with multiple assets. We Asset allocators do where we have added gold. Recently, we have added a product called Passive Multi-Asset, where we insert and activate global, local, gold ETFs.”

Naren is seeing value opportunities in fixed income, floating rate bonds and PSUs.

On the other hand, Thakkar is of the view that in America the price is what you pay and the value is what you get. But India is different for them. “Price is what you pay, but value is what promoters will let you get. In India, we have something called return on promoter equity. In addition to looking at traditional valuation metrics, it is important to focus on management quality and How are they allocating capital.”

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